…BUT PROBLEMS REMAIN.

Despite such progress, Azerbaijan’s relations with the international financial community are currently uncertain, and the country Azerbaijan is not expected to receive any new funding from the World Bank or International Monetary Fund before the first quarter of 2002. Azerbaijan reached agreement with the IMF in July for a 3-year, US$100 million Poverty Reduction and Growth Facility (PRGF). However, the second US$10 million tranche of Azerbaijan’s loan has been delayed because of problems in implementing IMF recommendations, including legislation on the budget and the development of a program for financial discipline in the energy sector, among other demands. The government had also expected to receive a US$30 million loan from the World Bank. Time, however, is now running out.

The World Bank funds were supposed to arrive before the end of this year in order to be used to help finance the budget deficit. Although the budget registered a surplus of 131.7 billion manats at the end of September, the deficit for the year is planned at 420 billion manat, or 2.0 percent of projected GDP. The deficit may be even larger than expected given that Azerbaijan’s GDP growth is expected to slow in the fourth quarter of 2001 as a result of the global economic downturn, combined with lower oil prices. In mid-November Finance Minister Avaz Alakbarov warned about the effects that the drop in oil prices could have on the state budget this year and next.

The Azerbaijani economy still relies far too heavily on oil, making it very vulnerable to price shifts. Fuel and energy products accounted for 90.5 percent of Azeri exports in the first nine months of 2001. According to the Finance Ministry, oil revenues should make up 34.7 percent of state budget income. The oil sector’s predominance will continue in the future in light of the fact that foreign direct investment continues to focus overwhelmingly on the oil industry. In the first ten months of the year, the oil industry attracted 90 percent of the total, or US$488.9 million. Just US$55.9 million went to other sectors.

If Azerbaijan fails to receive the World Bank funds before the end of the year, the government is expected to tap into the State Oil Fund to cover the deficit. One of the functions of the Fund is to keep budget deficits low. However, that money might be better used as a way of redirecting spending toward the non-oil sectors of the economy in order to ensure more even growth in the future (Interfax, December 2; Turan, November 14, 30; Trend, November 23; Azg, October 26).

The Monitor is a publication of the Jamestown Foundation. It is researched and written under the direction of senior analysts Jonas Bernstein, Vladimir Socor, Stephen Foye, and analysts Ilya Malyakin, Oleg Varfolomeyev and Ilias Bogatyrev. If you have any questions regarding the content of the Monitor, please contact the foundation. If you would like information on subscribing to the Monitor, or have any comments, suggestions or questions, please contact us by e-mail at pubs@jamestown.org, by fax at 301-562-8021, or by postal mail at The Jamestown Foundation, 4516 43rd Street NW, Washington DC 20016. Unauthorized reproduction or redistribution of the Monitor is strictly prohibited by law. Copyright (c) 1983-2002 The Jamestown Foundation Site Maintenance by Johnny Flash Productions